Automatic Gratuities May Be Headed Towards Extinction in 2014

The practice of automatically charging gratuity for large parties in a restaurant may be coming to a close, thanks to a new ruling from the IRS.

A new IRS ruling has resulted in some frustrated restaurant owners and disappointed servers, and could possibly end a practice that's bugged many restaurant patrons for years. At the center of this controversy is the automatic gratuity, that compulsory charge many eateries tack on to your bill when you dine with a large group of people. As of January 1, 2014, the IRS will start treating automatic gratuities as a service charge, a change that's got the food service industry up in arms.

Servers May Feel the Pinch

When the IRS ruling, which was enacted in June 2012, starts being enforced in January, servers will no longer be responsible for self-reporting their income from automatic gratuities to the IRS. Instead, restaurant owners will have a choice: they can start adding those automatic gratuities into a server's wages (which would mean more paperwork), or they can stop charging customers for automatic gratuities altogether. According to Denise Wheeler, an attorney who spoke with the Wall Street Journal, it's likely that "the vast majority of restaurant owners will discontinue the practice."

This could be bad news for servers who depend on tips because their hourly wages are usually far below the minimum wage. When the restaurant where he works stopped charging automatic gratuities, server Michael Turney, who spoke with USA Today, noticed a significant change in his income. "I feel like larger parties don't tip as well as they should for the amount that they spend at the restaurant," Turney said. "When they spend $200 and leave $20, you're losing out on about $16 or $17." He went on to say that some servers at the restaurant are now hesitant to take on large parties, because they can make more tips on smaller groups.

Some Customers Welcome the Change

While restaurateurs and servers may resent the IRS's automatic gratuity rule change, several customers have been vocal in their hatred of the practice. "Even if you generally tip more than 18%, automatic gratuities can't help but rub you the wrong way," read an editorial for the Chicago Tribune. "From a customer's perspective, a predetermined tip is mighty presumptuous. A server who doesn't have to earn his or her tips has little incentive to try, and the customer has no choice but to pay a premium anyway." The editorial also pointed out that a customer is rarely notified when an automatic gratuity is charged, which may lead them to leave a larger tip than they'd intended. "That's dishonest," the writer asserted.

We think it's unlikely that many waitstaff would be completely stiffed if all restaurants were to abandon automatic gratuities. As we've previously mentioned, a DealNews poll revealed that more than half of restaurant goers will leave a tip, even if they've received terrible service. At least one restaurant company is taking the rule change as an opportunity to explore new ways of encouraging customers to tip. According to the Wall Street Journal, Darden Restaurants Inc., which owns Olive Garden, LongHorn Steakhouse, and Red Lobster, has been "testing a new system in which the restaurants include three suggested tip amounts, calculating for the customer the total with a 15%, 18%, or 20% tip on all bills, regardless of party size."

There's no question that the IRS ruling will have a big effect on the restaurant industry, but it remains to be seen whether the change will lead to the annihilation of automatic gratuities. One thing is certain, though: Customers should always double-check their restaurant checks to make sure they're leaving the tip they intended.

Readers, how do you feel about automatic gratuities? Do you think servers deserve the compulsory sum for dealing with larger parties, or would you rather be the judge when it comes to leaving tips with your money? State your case in the comments below!

Michael Bonebright
Former Senior Blog Editor

Michael added the finishing touches to most of the Blog articles on DealNews. His work has appeared on sites like Lifehacker, the Huffington Post, and MSN Money. See him rant about video games by following him on Twitter @ThatBonebright.
DealNews may be compensated by companies mentioned in this article. Please note that, although prices sometimes fluctuate or expire unexpectedly, all products and deals mentioned in this feature were available at the lowest total price we could find at the time of publication (unless otherwise specified).


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Boo hoo! Maybe I've never been a waiter or worked at a restaurant, but how hard is it to put a plate of food and a drink down on a table...then maybe refill a drink, add a desert maybe? Why should i pay u for 'good service' when it should just be expected? Any other industry if u don't provide 'good work' or 'good service', you're fired & replaced! Tipping these days has lost its true meaning or value to people these days anyway. Why should consumers have to provide additional compensation just to have the expectation we will be provided good service when every single individual should be given the best service regardless! Where does it end and who is it that tells us which industries merit being compensated with tips on top of the what consumers already pay for? Tips should be ABOLISHED for good across all industries and employees should always be expected to provide the best service or find another job!
@boiceer " I consider it a charitable donation to the poor. :o)" WOW, could you be any more condescending?
Greg the Gruesome

Ah, O.K. But you seem to single out the tax man for blame when there are three parties to blame:
•Those servers in the past and those today who lied/lie about how much they got/get in tips, which caused the authorities to find a way to get some of the taxes that servers should be paying but are not
•The authorities whose guesstimate of the average fraction you receive in tips (12%) is too high (it may not be high enough for others, though)
•Customers who don't tip or don't tip enough

@boiceer "pubic hair in my soda"

It is usually just my wife and I dining so we are rarely affected, but I've never minded the automatic gratuity on large parties when we've been part of one.

I don't see frequent examples of great work ethics by workers either inside or outside the restaurant service industry, so my baseline for service (and receiving an average tip of 15%) is very low:

A) Keep my drink full... I don't enjoy paying to be thirsty
B) Fix mistakes efficiently... wrong order, cold food, pubic hair in my soda, etc.
C) Be polite and friendly

If you WOW me with exemplary service, I will WOW you with an excellent tip. In truly outstanding cases, I've let the server know they were doing an amazing job and gave them a 100
%, 200%, or 300% tip. I consider it a charitable donation to the poor. :o)

I think that the gratuity system helps ensure better service and it is unfortunate that we can't extend this payment model across all employment. Performance = pay
Its amazing, looking at the time and effort you put into your blog and detailed information you provide. I'll bookmark your blog and visit it weekly for your new posts.
@Greg the Gruesome

Okay, technically yes servers are in a low tax bracket because the income level is low. However servers are taxed heavier in comparison to other minimum wage jobs. For example, where I work we are required to claim at least 12% of our sales at the end of each shift. So say there's $1000 in sales, I have to claim at least $120 in tips, even if I don't make that much (hence the reason why getting no tip actually causes me to lose money). We get taxed on these tips as "earnings" resulting in more money being withheld from our actual paychecks. So I would definitely consider a paycheck of $34.27 for 40 hours of work (personal example) being heavily taxed when at $8/ hour that paycheck should be over at least $200.
Greg the Gruesome
@Everyone who wants to leave a less-than-customary tip for subpar service:

How is the server supposed to know the disappointing (for them) amount was left because of their performance and not due to the customer's stinginess or ignorance? What would you do if tipping were abolished and you receive subpar service? If you'd tell the manager, why not tell the manager now?


Isn't mandatory sharing your tips with the busboys (and other staff) illegal or is it illegal on a state-by-state basis?


"Heavily taxed" doesn't mean what you apparently intend it to mean. It means that one pays a high percentage of one's income in taxes. Considering the fairly low incomes that many (most?) servers make and that tax rates in the U.S. are progressive, you are no doubt _lightly_ taxed. It's not the fault of the IRS that your after-tax income is so low when your pre-tax income is low, too. And I don't see how the government chooses this system; I'd say it just accommodates it.
When restaurants started doing this, I double tipped at least twice because I did not realize they had already added the tip on! And yes, I have had poor service from some servers that knew they had a guaranteed tip, regardless of their performance. Treat me well, I'll treat you well.
I've been a server for over 4 years to put myself through college and I work at a restaurant who has recently abolished automatic gratuity. It's frustrating to hear people who have never actually worked in a restaurant speak on this topic so ignorantly. I truly feel that it should be a life requirement to have to work in a restaurant to experience what servers go through on a daily basis. You'd be surprised to see how some people act over food and drinks and how many times servers do get stiffed in general, especially with large parties. And FYI, servers paychecks are so heavily taxed by the IRS and even though servers are paid minimum wage, the actual amount we see is way below minimum wage. Living in California with a minimum wage of $8/ hour, it is not uncommon to get a paycheck far less than $100 for over 40 hours of work. I'm all for restaurants paying a decent wage and abolishing tips but the US Government chooses to use this system so that won't happen at least anytime soon.
I'm a student who go to school full time and waits tables around 30 hours a week. The restaurant I'm working at has just started to charge a gratuity of 15% on any parties of six person (not counting kids on high chairs). We did not charge those parties in the past, and me and co-workers did not always get that 15% tips of the bill. I mean, come on people, your bill is around $200 and you give out $10 to tip your server? That's not even 10% of the total. Fyi, our minimum wage is much lower than what you can imagine, and we do have to pay out 8% of our tip for busboys. I have seen many "cheap" people going out to eat without even tipping us a penny, so please we do not want to clean up a whole big mess of 10 persons and receive 5% tip. Remember, a big table is harder to serve than just a table of 2 or 3.
I want tips abolished all together and servers paid a decent wage.
I will get up and walk out of a restaurant if they charge a mandatory tip. I tip on service. PERIOD. I tip very well with better than average service and I tip horribly if the service sucked. It's my money I will use it as I see fit. (No relation to HeyTiger)
Thank you Dealnews-Lindsay for being objective about it and not just reactive like HeyTiger. And for info my father used to wait tables in Belgium when tipping was customary and he also waited tables after they got rid of the tipping system. So I do know what I am talking about. I have actually known both systems. And an all inclusive service works out better in the long term. Servers get a decent salary and as you rightfully pointed out people would still leave a small tip behind for good service while they did not have to.
In a hotel and catering environment, "service charge" means the house is taking a cut or all of the gratuity from the serving staff. Also, hotels will often tax the service charge which is a questionable business practice. With all this said, how will this new IRS rule effect hotel and banquets?
politicalwhaaaat? You forgot to further hyperventilate:...and the sky will fall, the ground will collapse, the earth will crash into the sun....
I always resented raising the suggested tip from 15% to 18% (and in some places 20%) for two reasons: 1) because it was a way for restaurants to increase a servers wages without raising their hourly wages, and 2) as food prices go up, so does the average check price, and therefore, so does the tip amount, This allows for tip inflation at a reasonable, determinable rate-not an arbitrary rate set by corporations to make more profit on the back on low wage workers.
How many other job positions pay you just for showing up to work with your handout to be paid for doing as you wish ? Tipping is for good service not just showing up to collect.
Good service to the customer, not a free $ for coming in. So pay then pay them a wage like everyone else and if you work you get to stay and end the games. If not you get replaced and go home and they hire someone to work. About the only thing free now days is Obama care that others work for your payment while you do not work, Hmmmm... get your tips for free 15% to 20%, without working but just show up to collect them no checks or balances to see if you earned them , and your Obama care, get both for free, best of both worlds then soon all business will close.
Lindsay Sakraida (DealNews)
@HeyTiger So you're opposed to servers getting paid a higher wage, rather than depending on tips? Is it because servers likely come out ahead with tips even if it's variable? (Keep in mind, even though tips are factored into the cost of goods in Europe, it's still customary to leave a small additional tip as well, for good service. I think it's perfectly acceptable NOT to though too, especially in recent years...)
It's clear neither one of you has waited tables, so perhaps you should consider the fact that you're not qualified to comment and kindly shut your mouths.
I think some servers need to learn better customer service, or get out of that industry (maybe work at McD's or Taco places). Good service to me earns better tips, and mandating a tip for poor service just angers me.
Just get rid of tips all together and start paying the servers a proper wage like they do in many other countries all over the world. Customers know what they will be getting and servers know what they will be getting. You just have to look at the system in the EU and you know that it can work. In Belgium for example they got rid of this tipping system in the early 1980's if my memory serves me well. When will the US catch up?